Accounting for

Merchandising Business
Guillermo Briones
 – A merchandising business is an entity engaged in the activities of
buying and selling of products.
– The main difference between merchandising and the servicing
Nature of a business is the existence of physical products sold to the
customers.
Merchandising – Merchandising is also different from manufacturing business
Business because it does not produce its own product for sale.
– Other terms used to describe merchandising business are “trading
enterprise,” “trading firm,” or “buy and sell business.”
Merchandising
Nominal
Accounts

Pro forma
Income
Statement
Major
Activities of – Purchasing activities
the – Selling activities
Merchandising
Business
 – Purchasing activities refers to the buying , procurement or
acquisition of finished products intended for sale. In accordance
with the historical cost principle the cost of the product acquired
Purchasing includes the purchase price plus all other incidental costs related
to the acquisition of the product.
Activities – Generally a purchase is perfected upon the delivery of the
merchandise bought by the buyer except when there is an
agreement to the contrary.
Common
– Under periodic inventory system the account title purchases is
Account Title used to describe the products that have been purchase and
used in intended for sale.
– Under the perpetual inventory system the account title used to
Purchasing describe the product for sale is merchandise inventory.
Activities:
PURCHASES
 Assume that Eastern Enterprise has a beginning merchandise
inventory of P10,000.00 It purchased merchandise intended for sale
from Northern Company amounting to P100,000.00 on account
Illustration payable within 20 days after delivery. Northern Company grants a
two percent (2%) discount if payment is made within 10 days from
the date of delivery.
Periodic
Inventory
System
Perpetual
Inventory
System
 – Refers to the account title for transportation cost incurred by the
buyer in transferring the merchandise from the seller.
– It is also known as transportation – in account.
Freight-in – This account has a normal debit balance. It is added to the
purchases account to obtain the total gross purchases.
Illustration
 – Purchase returns account is used when some of the merchandise
Purchase purchased are subsequently returned to the supplier because of
defects or non compliance with the desired speicification.
Returns
Illustration
 – Selling pertains to activity of transferring the title of ownership
over the merchandise from the seller to the buyer for a
consideration either in money or any other thing of value.
– As a general rule a sale is perfected upon the delivery of the thing
Selling sold. In selling a trader usually adds a mark-up to the cost of the
product he purchased. This mark-up is commonly called gross
Activities profit.
– Sales – the sale of merchandise like the sale of service, is recorded
by a credit to the revenue account. In merchandising business the
revenue account is described as sales.
 – Assume that Eastern enterprise sold to Bin Ladin a merchandise
amounting to P125,000.00 including a mark-up of P50,000.00 on
account collectible within 30 days. As Eastern policy a cash
discount of 3% is granted to customers if payment is made within
5 days.
– The related journal entry would be:

Illustration
 – Freight out refers to the account title for transportations cost
incurred by the seller in transferring the merchandise to the buyer.
It is also known as transportation out, transportation expense or
delivery expense account.
– This account has a normal debit balance. Freight out is treated as a
selling expense account under the operating expense caption of
the income statement.
Freight Out
 – The sales returns account is used when some items of
merchandise sold are returned by the customer because the items
delivered are defective or do not comply with the orders
specifications. To document the acceptance of return the seller
Sales Returns would issue a credit memo.
– The sales return account is a contra-revenue account. So it is
deducted from the sales account to arrive at the net sales. It has a
normal credit balance.
Illustration
 – The sales allowances account is used to describe reduction on
sales due to reasons similar to sales returns. However there is no
Sales actual physical return of the goods to the seller because the buyer
decides to keep them as the seller allows a price reduction for the
Allowances merchandise acquired by the buyer. It is a contra-revenue
account. It has a normal debit balance.
Illustration
 – The cash discount on sales of merchandise is described by the
account title sales discounts which is generally effected in the
Sales Discount books of accounts when the buyer pays within the discount
period. It is a contra-revenue account against sales.
Illustration
Trade
– There are two kinds of discounts that may be offered by a
Discounts vs business enterprise, namely:
– trade discount; and
Cash – cash discount.
Discounts
 – As a rule trade discount are never journalized. It is sometimes
called quantity discounts.
Trade Discount – Trade discount is the amount deducted from the suppliers price
list or price catalogue to arrive at the invoice price.
 Product List Price Terms Items to purchase
options
1 P100,000. 30, n/30 5 to 10 items
00
2 P100,000. 30, 10, n/30 More than 10 to 20 items
00
3 P100,000. 30, 10, 2/15, n/30 More than 20 items

Examples of 00

catalogue Meaning of pricing symbols:

– P100,000.00 – the list price. It is the suggested retail price.
prices with – 30 – thirty percent (30%) It is the first trade discount deductible from the list price
trade of P100,000.00.
– 10 – ten percent (10%). It is the second trade discount deductible from the balance
discounts net of the first discount.
– 2/15 – two percent (2%) cash discount is given based on the invoice price if paid
within fifteen (15) days.
– 2/15 EOM – two percent (2%) cash discount is given based on the invoice price if
paid within fifteen (15) days from the end of the month.
– n/30 – if not paid within 15 days, net amount (n) without the 2% discount must be
paid within 30 days.
 Assume that Bush Enterprises sold merchandise to Bin Company at
a list price of P100,000.00 trade discount -25, 10; 2/10, n/30.

Illlustration
Appropriate
Journal Entries
 – In contrast cash discounts are journalized in the books of accounts.
Manufactures and wholesalers often offer cash discounts to
Cash encourage prompt payments.
– If availed cash discounts is deducted from accounts receivable of
Discounts the seller or accounts payable of the buyer.
 Assume that Bin Company paid within 10 days the computation of
actual cash payment to the Bush Enterprise would be:

Illustration
Appropriate
Journal Entries
 – F.O.B. Shipping Point
transfer the title of ownership to the buyer upon shipment.
– F.O. B. Destination
FOB
transfer the title of ownership to the buyer upon reaching
the destination point.
 – Refers to the Freight on Board, Shipping Point which means that
ownership of product transferred to the buyer upon shipment.
FOB Shipping The buyer becomes responsible to shoulder the cost of
Point transportation.
 – Growing Enterprises purchased P200,000.00 worth of
merchandise from Oldie Company with terms of 2/10, n/30, FOB
Shipping Point Collect. JRS transported the product and collected
P10,000.00 as transportation fee. The related journal entries
would be:

Illustration
 – Refers to the Freight on Board Point of Destination which means
FOB that ownership of product is transferred to the buyer only upon
reaching the specified place of destination.
Destination
 – New City Enterprises purchased P100,000.00 worth of
merchandise from Old Town Company with terms of 2/10, n/30
FOB Point of Destination, Prepaid. JRS transported the products
and collected P5,000.00 as transportation fee. The related journal
entry would be:

Illustration
 – Notes:
Only the seller effected a transportation entry, Freight Out
Illustration because the contract is FOB destination point-the seller
owns the goods while in transit. The buyer will not have an
entry for transportation because he acquires ownership
only when the goods have reached the point of destination.
 – Freight Prepaid – this term means that the actual payment of
Freight transportation cost shall be made by the seller to the common
carrier. If the contract of sale is FOB Shipping Point Freight
Prepaid vs Prepaid, the obligation of the buyer is increased by the amount of
transportation cost paid by the seller on his behalf.
Freight Collect
 – Mabenta Dry Goods sold P50,000.00 worth of merchandise to
Zamboanga Bazaar. The terms of sales contract are 2/10, n/30
FOB shipping point, freight prepaid P2,500.00. The related journal
entry would be:

Illustration

– Note: The Freight In account is still recorded in the books of the

buyer because the agreement is FOB shipping point.
 – This term means that the buyer shall make the actual payment of
transportation cost to the common carrier such that when the
contract of sale is FOB Destination, Freight Collect, the accounts
Freight Collect payable by the buyer is reduced by the cost of transportation
because the buyer paid the shipment cost on behalf of the seller.
 – Bombay Bazaar sold P150,000.00 worth of merchandise to
Mindanao Enterprises. The terms of sales contract are 2/10, n/30
FOB Destination freight collect P10,000.00. The related journal
entries would be:

Illustration

– The freight out account is recorded in the books of the seller

because the agreement is FOB destination – ownership of goods
in transit belong to the seller.
 – The following table summarizes the common terms used for
transporting products and their corresponding effects.

Summary of
Transportation
Terms